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Why vacuum at Central Bank could be behind the latest shilling slump

By Jackson Okoth | May 30th 2015
Central Bank of Kenya PHOTO: JENIPHER WACHIE

It is now apparent that besides external factors beyond control of monetary authorities, part of the reason the Kenya Shilling is hurtling down against the US dollar could be lack of a substantive Governor at the Central Bank of Kenya (CBK).

When markets opened yesterday, commercial banks quoted the shilling at 97.75/85 to the dollar from 97.50/70 at Thursday’s close with dealers eyeing Sh100 to the greenback in the coming days. However, yesterday’s trading reversed an earlier drop of as low as 99.13 the previous day. CBK sold an undisclosed amount of dollars on Thursday’s session, buoying the shilling from a low of 98.95/99.05 - a level last seen in November 2011.

The process of replacing Prof Njuguna Ndungu as CBK Governor was initiated by the Public Service Commission, which conducted recruitment and interviews before forwarding names to President Uhuru Kenyatta. It is at this point all systems went dead until Parliament went on recess before vetting names of those to fill positions of Governor, Deputy Governor and Chairman of CBK Board.

In what adds to the disquiet surrounding the appointment, this week President Uhuru Kenyatta wrote to Parliament informing the House of the nomination of Eugene Wamalwa as Cabinet Secretary for Water and Irrigation and Monica Juma as Secretary to the Cabinet. Both are set to be vetted on June 9 before they are formally appointed. But he failed to submit the nominees for chairman. governor and two deputies at CBK even as uncertainty in the forex market grows.

“A Central Bank without a Governor even for one day is never a good thing. It is not good to leave the country’s most important financial institution in limbo. We knew Prof Njuguna Ndung’u term was ending March 4, 2015. The ideal situation would have been to have the Governor appointed while the outgoing one was still around as there is usually a lot of handing over work between the two. The delay in the announcement is very bad for the economy,” said Mohamed Wehliye, Senior Vice President — Financial Risk Management, Riyad Bank, Saudi Arabia.

He added that the longer the wait, the more the uncertainty builds up in the economy. “The optimal situation would be to get an appointment as soon as possible. I hear the president is waiting for Parliament to resume so the new governor can be vetted but I don’t see why that is even needed,” said Wehliye.

The 2012 CBK Act requires competitive hiring of a governor. It is still unclear why the Government decided to use parliamentary vetting while the law permits recruitment through a competitive process. “In my view, the president should go ahead and appoint from one of the three names that have been submitted to him because there is no law he would be breaching in doing so.”

“We have already seen this delay in appointing the next CBK Governor affecting the Kenya Shilling exchange rate to some degree. What we need is some authority from the CBK to calm jitters in the economy,” said Dr Samwel Nyandemo- Senior Lecturer- School of Economics at the University of Nairobi.

Suffer big shocks

Apart from a vacuum at the Governor’s office, the terms for three members of the CBK top policy-making organ-Monetary Policy Committee (MPC), has expired. They are Sheilla Mbijiwe, Cliff Mukulu and Rose Ngugi. Mbijiwe, an insider and seasoned banker, is considered a front runner in the race of deputy governor’s position given her close links with the establishment, gender and experience. Observers maintain that this delay in appointing a substantive head at CBK could be due to behind the scenes jostling to ensure certain political interests are taken care of.However, there are also analysts and economists who think that appointment of a substantive head at the CBK may not do much for the local unit.

“When you look at the available statistics, Kenya is still doing well in terms of macroeconomic stability with monthly inflation still below the double digit levels. However, with fuel prices edging up, we should be keen on what is happening to the Shilling so that we do not suffer big shocks from imported inflation,” said Dr Joy Kiiru, also an economist at University of Nairobi.

The Central Bank of Kenya’s Monetary Policy Committee will meet on June 9. The MPC last met on May 6, when the benchmark rate was left unchanged at 8.5 percent, and usually only meets bi-monthly.

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